We initiate coverage on OldTown with a BUY recommendation and a RM3.00 TP – based on 17x FY18F P/E, representing a 48% upside. We believe that OldTown, the #1 white coffee brand in its core markets, is poised to tap the relatively unsaturated China market. Valuations are a bargain as OldTown is trading at a 35% discount to its domestic-centric local peers and 50% to its direct peer, Super Group. Our TP is based on 17x FY18F P/E, w

We initiate coverage on OldTown with a BUY recommendation and a RM3.00 TP – based on 17x FY18F P/E, representing a 48% upside. We believe that OldTown, the #1 white coffee brand in its core markets, is poised to tap the relatively unsaturated China market. Valuations are a bargain as OldTown is trading at a 35% discount to its domestic-centric local peers and 50% to its direct peer, Super Group. Our TP is based on 17x FY18F P/E, which is a 20% discount to the simple average PE of its FMCG peers of 21x. FMCG earnings contribution account for 76% of total earnings. The stock offers an estimated dividend yield of 3.8-5.0% for FY17-19F, aligned to its peers including estimated stronger 3-year earnings CAGR of 23% (vs. peers: 1.5%). A key catalyst to OldTown's rerating from our P/E peg to Super Group’s 4-year P/E average of 26.0x is when OldTown’s FMCG makes consistent headway into China. However for now, we believe our PE assumption is fair given OldTown’s smaller earnings base and liquidity.

We are positive over OldTown’s sales channel distribution, which is focused on ecommerce in China. About 80% of its China sales are derived through these virtual stores. The headway combined with a proven track record in Hong Kong as the #1 white coffee producer with more than 50% market share, allows OldTown to tap into China’s under saturated coffee consumption, which trails Malaysia’s coffee consumption per capita by 35x. Operationally, OldTown has an outstanding track record. It registered six consecutive years of PBT margin expansion from 16.7% in FY10 to 29.5% in 9MFY17. Driven by its FMCG profitability, OldTown continues to outperform its larger FMCG peers, Super and Power Root, by almost a factor of 2x. Key risks include operational execution glitches and commodities prices such as coffee and palm oil, although 6 months of inventory levels allows for flexibility to time its purchases.